Social responsibility, maximising profits?

In his article “The Social Responsibility of Business is to Increase its Profits” (1970), Milton Friedman, the Nobel laureate in economics, argued for what was summed up in the title of his article: the social responsibility of businesses is simply and solely to maximise profits!

In the following, different arguments for and against Milton Friedman’s statement will be presented and criticized. The inherent theories and principles will be presented as far as needed in order to discuss the extent to which this statement is true.

Milton Freidman starts his famous article by describing the claim for a social responsibility of business by a “pure and unadulterated socialism”. For him, stating that business has a responsibility is looseness and lacks rigour. A company is only an artificial person and can not have responsibilities like an individual can.

In this regard, only people in an organization, which means only the in­dividual proprietors or the corporate executives, can have any social or moral responsibility.

The managers of a company have a legal responsibility to manage the company in the best interests of the stockholders. As those shareholders’ first interest in investing their money in a business is to increase their wealth, then the managers’ sole responsibility is to maximize the profits for their shareholders. It is the legal and moral obligation of the managers to concentrate solely on serving their employers’ best interest, which means increasing profit.

If the managers or the shareholders feel the need to fulfil any moral, social or ethical duties, they may very well devote some of their incomes or time to such activities. They are in doing so “acting as a principal, not an agent”. They are spending their own money and time, not those of the corporation they are working for and those of its shareholders.

If an executive or a manager is fulfilling any social responsibility, this means that he will act in a way that is not in the primary interest of his employer, or worse, that is violating his duty of maximizing the profit.

Any money or time that is spent by an executive in any kind of social action will not be spent to increase the shareholders’ wealth, to reduce prices or to increase wages. Therefore, this executive is spending someone else’s money, the shareholders’, the customers’ or the employees’.

Furthermore, in doing so, the manager is actually imposing a tax to the shareholders, the customers and the employees. He is also deciding on how those tax proceeds are to be spent.

This is for Freidman a governmental function.

In doing so, executives are, as per Freidman, simultaneously legislators, execu­tives and, jurists. They become what Freidman calls public employees, civil servants even though they are employees of a private corporation.

It is therefore the government’s responsibility to impose taxes and determine the expenditures to be spent by any and all businesses in social activities.

Freidman also recognizes that some businesses might act “socially”, contribute to chari­ties or provide amenities. This can be described hyp­ocritically by social responsibility or social actions. The real and hidden reason for businesses in doing so is to gain a long-term profit from such actions, like attracting desirable employees, reducing wage bill or tax proceeds.

To summarize his thoughts and in his tribute to an ideal free-market, Freidman believes that “no individual can coerce any other, all coopera­tion is voluntary, all parties to such coopera­tion benefit or they need not participate. There are no values, no “social” responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form. “

Some others do believe, all the same way, that the sole responsibility of a company is to compete to maximize profit. Adam Smith (As reported by The Economist, 2005) believes that benevolence is not necessary to advance the public interest. Rather, self-interest and profit-seeking is what brings humans to accomplish things, produce goods and services and thus benefit each others. It is false to think that profit-seeking fails to serve and advance the public interest, and that something else needs to be given back to the society to compensate for this profit-seeking.

Keith Davis (1973) advances several arguments against the so called Corporate Social Responsibility. First of all, as per Freidman, the business function is an economic one, and the manager is the agent of the stockholders and has thus to maximize their profits.

The second argument given by Davis is the costs of the social involvement. Indeed, many social goals do not have any economic outcome. Any business must spend with great caution its scarce resources, although sometimes very substantial, or it will sooner or later cause financial distress. Indeed, scarce resources will never self-renew, and must thus be spent in a way that guarantees at the minimum their recovery, if not gaining some premium.

The author here cites some example metal foundries which could not meet the high costs of new pollution equipment and closed their doors.

Another argument advanced by Davis is the lack of social skills of many businessmen. The author questions whether those businessmen, who are experts at generating profit, are well qualified to deal with social and public interests.

Keith Davis also presents the argument of the dilution of the business’ primary purpose. A business involvement in social activities might dilute its primary focus on economic productivity, “divide the interests of its leaders, and weaken business in the market place, with the results that it would accomplish poorly both its economic and its social roles”.

Furthermore, if a business spends resources in social programs, then these resources must be recovered, generally by increasing prices to the final consumer. In the same manner, if spending in social activities reduces the business’ productivity, this leads to higher production costs. If the business is operating in international markets with other firms that do not have to support such additional costs, the socially responsible ones will have a competitive disadvantage.

Another argument is that the businesses that would support social activities will have additional social power. Davis states that “business is one of the two or three most powerful institutions in society at the present time”, giving extra social responsibilities to the business would result in an excessive concentration of power which will “reduce the viability of our free society.”

In addition, Davis believes that although some people want businesses to be more responsible and socially involved, some don’t. This lack of agreement among the public may result in a lack of broad support for the businesses and thus social frictions and disagreements.

Finally, one of the most relevant arguments given by Keith Davis is probably the fact that businessmen are not accountable to people, but only to their stockholders. It should therefore be “unwise” to give them responsibility in areas where they are not accountable!

This idea of non-accountability of businessmen and managers is also used by Michael C. Jensen (2002). Jensen criticizes the stakeholder theory as stated by Freeman (1984), Clarkson Principles (1999) and others because it “contains no conceptual specification of how to make the tradeoffs among stakeholders that must be made. This makes the theory damaging to firms and to social welfare”. According to Freedman, as stated by Jensen (p. 254), “The … definition of ‘stakeholder’ [is] any group or individual who can affect or is affected by the achievement of an organization’s purpose”. This includes shareholders, customers, employees, suppliers, but also the people who might be affected directly or indirectly by the company’s business, through for example the damages to the environment, the layoffs, the corruption etc. Adopting the stakeholder theory brings businesses to be socially responsible.

Jensen states that the managers who adopt this stakeholder theory will do what they want, spend the business’ money in social or other activities which are of no interest to the business or to the stakeholders, and will not be accountable for that.

He thinks that the stakeholder theory must be inline with the long-term objective of value maximization. Only by keeping in mind that the value needs to be maximized that managers will find the good trade-offs between the different stakeholders.

In a less extreme position than Freidman and the other authors cited above, Patrick Primeaux and John Stieber (1994), as well as Josie Fisher (2004) believe that social responsibility and long-term profit are not incompatible, and that being socially responsible could be converted into business opportunities. Orlitzky (2003), Russo and Fouts (1997) and Waddock and Graves (1997) (as cited by Husted and Salazar, 2006, p. 75) even found that corporate social performance has a positive impact on the firm’s financial performance!

However, several different researches “employed a variety of theories and methodologies to study the potential relationship between corporate social responsibility activities and other traditional measures of a firm’s success” (Mahoney and Roberts, 2007). The results are confusing.

Rim Makni, Claude Francoeur and François Bellavance (2009) found in their study “that socially responsible firms experience lower profits and reduced shareholder wealth, which in turn limits the socially responsible investments”.

Bryan W. Husted and José de Jesus Salazar (2006) state on their side, that a business can not make maximum profit while investing in social responsibility activities. Rather, great overall social and financial output can be achieved only when businesses adopt a strategic approach, than an altruistic approach.

Kant would have argued that even if the outcomes of such businesses’ actions might be beneficial to the society, the intention of those businesses is bad in the first place. As far as people are used as a means for those businesses to maximize their own profit, they are not ethical.

All of the above are arguments that tend to support Freidman’s theory, which in turn states that a business must concentrate on maximizing profit. The less extreme approaches suppose that it is possible to conciliate social activities and profit maximization, but the latter must remain the primary goal of any business.

Keith Davis, in his call for a social responsibility of businesses, puts forward the arguments that acting socially would serve the long-run self-interest of the business, enhance the public image and the viability of the business, avoid any government regulation, serve the stockholders interest and prevent any future social problems, thus before all maximizing the long-term profit for the shareholders.

The whole issue of ethics and business ethics is a complex one. Companies are made up of people. Multinationals are made up of many different nationalities. Several opponents to Freidman’s theory do believe that businesses are part of society and as such they should reflect society norms. Companies, especially multinational ones, do have responsibilities in the world and have to be a positive influence. If a company is not ethical, then it will not survive as a company.

Marjorie Kelly believes that maximizing profit and returns to shareholders isn’t a legitimate mandate. Indeed, she argues that the shareholders are in effect not financing the public corporations. The money that a shareholder invests in a public company does not go to the company itself but rather to other speculators. Such investments go to the public corporation only when new common stock is sold, which is a rare event. Actually only the founders, entrepreneurs and initial investors are bearing the risk associated with a business. 99% of the money which is invested further on in those companies goes to the original investors and not to the company. So in effect, an established business is not getting any money from the shareholders, who are rather exchanging their stocks and gambling on several fields. They are thus not the legitimate owners or funders of the business which in turn does not have to care about their desires more than those of other stakeholders and the community in general.

Freidman, in his argumentation, states that only individuals in a business can have moral responsibility, but every business is made up of the decisions freely taken and approved collectively. The responsibility in such a decision process is thus not reduced to an individual, but rather it is a collective and shared responsibility among all the individuals who drive a business. As soon as the decisions are freely chosen and approved by the collection of individuals who run the business, they are all responsible for the outcomes of those decisions and are subject to moral evaluation.

Furthermore, by seeking solely the profit maximization, some managers might allow or induce actions which may be illegal but are for sure immoral, like aggressive selling techniques or untrue publicity. They are, for this, acting in an immoral way and are responsible for that.

Social responsibility refers to the obligations businesses have toward society. These are obligations that ought to be fulfilled; which indicates a normative use of the term (Josie Fisher, 2004). The author opposes to the classical economic view of Freidman and Levitt, the socioeconomic view that offers a broader account of social responsibility. “Business has obligations that go beyond pursuing profits and include protecting and improving society”. Boatright (2000), as cited by Fisher (2004, p.396), goes on to say that by implication businesses must be willing “… to forgo a certain measure of profit in order to achieve noneconomic ends”. Backman, also cited by Fisher (2004, p396), identified some examples of corporate social responsibility: “Employment of minority groups, reduction in pollution, greater participation in programs to improve the community, improved medical care, improved industrial health and safety”.

The social responsibility of a business is then to comply with the behaviours and norms that society expects business to follow. This focus on the socioeconomic view is a normative discourse, as it emphasizes how society believes business ought to behave.

Several studies and researches have been conducted in the last decades on the business ethics and on how companies ought to behave. Those studies concentrate on three main subjects inherent to today’s business: The globalization, the sustainability and the stakeholder theory presented earlier.

Indeed, in recent times, multinational companies have grown rapidly and are yielding an excessive power. Those firms have also invaded multiple countries and cultures and are having an excessive economic and political power especially in smaller and poorer countries. They therefore are now responsible for their actions that might greatly impact such countries. Taking benefit of the poorness of local population to practice low wages or employ children is for sure a socially irresponsible action of those businesses.

The second concept that has been studied in the recent ethics researches is sustainability. The sustainability is about the long-term effect of any business (or other) operation on any external factor like environment. As a matter of intergenerational equity, it is the businesses’ responsibility to consider the effects of their activities on the natural resources and the society and to repair any damages that can affect the future generations’ rights and equity. It is therefore the businesses’ responsibility to act sustainably.

The third concept is the stakeholder theory, which has been presented earlier. The normative discourse of business ethics states that businesses ought to take into account the interests of all stakeholder groups.

The different arguments presented so far range from those supporting Freidman’s statement that any business’ social responsibility is to solely maximize the profits to the shareholders, those who support that a business can and has the duty to be socially responsible and try to advance the public good as far as this will have a beneficial impact on the long-run value and profits of the company, and finally those arguments supporting that any business ought to act socially, sustainably, invest in programmes that benefit the public interest, and be morally responsible for the outcomes of its operations. The supporters of this last view believe that businesses have to adapt their objectives, from solely financial, to a higher level which is all of the stakeholders, the public, the environment and the future generations’ interest.

The latter arguments are therefore normative, and do provide a view about what business ought to be. This is the aim of the business ethics philosophy.

From a more practical point of view, and considering how the companies are acting in today’s world, it is true that many of them are advocates and practitioners of Corporate Social Responsibility. Many CEOs, especially in Europe, are convinced that basic capitalism fails to serve the public interest, and are promoting moral and socially responsible actions in their companies, like treating employees well, encouraging loyalty among customers and suppliers, avoiding any investment in unethical markets or countries that pay low wages and employ children, saving energy and recycling.

However, no one doubts that this is not a standard yet. Social responsibility is not the norm today, and although some practitioners of Corporate Social Responsibility are getting some benefit, like a good public image, many of them are disadvantaged because of such social investments that some competitors do not support.

Also, in the name of social responsibility, some multinational companies stopped their investments in poor countries where wages are very low. This is having a negative impact on those countries concerned that would have benefited from those investments.

It is the aim of the business ethics discipline to study and propose what businesses ought to do and how they ought to behave. But I do think that it is the role of the governments to impose some basic moral principles and behaviours that must be respected by each and every business. Businessmen ought to behave morally but they will never all do so. A “critical morality of moralities” or a “Metaethics” has to be imposed by a higher institution – governments- in order to guarantee the basis for equity.

Conclusion

In this work, different arguments for and against the 40-year old but still so famous statement of Milton Friedman that “The Social Responsibility of Business is to Increase its Profits” have been presented and discussed. The normative discourse stating how business ought to behave is for sure morally and ethically against this statement and its arguments will sound both moral and logical for any mind.

However, reality is far from the moral ideal. In my opinion, it is the governments’ responsibility to impose a minimum ethical code to be respected by businesses and individuals to guarantee the equity of rights and advance the public interest.